How the Queen was dragged into tax havens affair

For most of the past 750 years the Duchy of Lancaster has accumulated its wealth through a combination of legacy, alliance and confiscation. More recently, however, its growth has been delivered through active management of a diverse portfolio of property and financial assets. What began in 1265 as an inheritance of baronial land from Henry III to his son Edmund has evolved into a £519m asset mix that is heavily concentrated in commercial, residential and agricultural property, with a small slice devoted to financial instruments. It is the duchy’s 10 per cent allocation to financial assets that has attracted most scrutiny due to two offshore holdings revealed in the Paradise Papers. The leak showed that a total of about £10m had been invested in two offshore funds. In 2004 the duchy committed £5m to the Bermuda-based Jubilee Absolute Return Fund. That investment ended six years later. In 2005, the Queen’s estate invested $7.5m in Dover Street IV Cayman Fund, based in the Cayman Islands, a stake it still holds. It makes up 0.3 per cent of the overall portfolio. Through this investment, the duchy owns a position in BrightHouse, a rent-to-own retailer that has been accused of irresponsible lending and has relocated to Luxembourg, where its UK tax bill is reduced. The BrightHouse stake is valued at £3,208. In response to the release of the Paradise Papers, the duchy made clear that the Queen does not manage her wealth personally and said: “We operate a number of investments and a few of these are with overseas funds. All of our investments are fully audited and legitimate.” Nathan Gelber, founder and chief investment officer of Stamford Associates, which advises big investors with £70bn of assets, said it is “not unusual” for so-called institutional investors to invest in offshore funds.

He said that although this is sometimes done to reduce tax bills, in most cases there were legitimate reasons for doing so. Many offshore funds are not subject to strict diversification rules, which are common in the EU, meaning they can run a much more concentrated portfolio. “The investment freedom in some of those tax havens is considerably larger and that is an important consideration for many investors,” he said In other cases, a fund will be available only offshore, so investors who want access to particular portfolio managers will have little choice, he added. “Our pension fund clients will often invest in offshore funds. They would do their due diligence, from an operation and governance perspective. But once they have done this they would invest without any hesitation.” The Queen, who also holds the title of Duke of Lancaster, is the beneficiary of the duchy, from which she receives an income. Last year it provided £19.2m, a 7.9 per cent annual increase, having grown from just over £12m in 2013. The duchy is not subject to corporation tax, but the Queen pays tax voluntarily on the income she receives from it, according to a spokesman. The duchy is administered for the Queen by Patrick McLoughlin, the chancellor of the Duchy of Lancaster, though oversight of the portfolio is delegated to a council whose members are appointed by the sovereign on the advice of the Conservative MP. The council is chaired by Mark Hudson, a former chairman of the Game and Wildlife Conservation Trust, and its chief executive is Nathan Thompson, previously managing director of Forth Ports. The council includes Sir Alan Reid, keeper of the privy purse who manages the monarch’s finances, Martin Beaumont, the former Co-operative Group chief executive, and Kathryn Matthews, a non-executive director at investment companies, including Rathbone Brothers and Hermes Fund Managers. The 10 per cent of the portfolio that is focused on financial assets, which provides much of the liquidity, has been managed by Newton Investment Management, a boutique under the Bank of New York Mellon umbrella, since 2004.

The duchy’s investment portfolio is overseen by Stanhope Consulting, the advisory arm of Stanhope Capital, an investment company that manages $9.5bn for wealthy families and charities. Stanhope’s advisory board is chaired by Lord Browne of Madingley, the former BP chief executive, and includes Sir Martin Sorrell, chief executive of WPP, the advertising group. Stanhope’s investment committee includes Lord Lamont, the former chancellor. The financial portfolio is reviewed every three months by Stanhope and the duchy’s council to make sure it is meeting the long-term risk and return objectives. In this year’s annual report, Sir Mark and Mr Thompson wrote: “The duchy gives ongoing consideration regarding any of its acts or omissions that could adversely impact the reputation of the duchy or Her Majesty The Queen.” The 18,540 hectare property portfolio consists of mainly agricultural and commercial assets, with 317 residential properties. The commercial holdings, which are almost exclusively managed by Knight Frank and Savills, include the Savoy estate in London and Harrogate estate in Yorkshire.